The effect of changes in interest rates on credit granted by commercial banks in Kenya
Abstract
Until June 1991, the Government of Kenya maintained a policy of interest rate
control. This meant that the Government was instrumental in setting maximum
nominal interest rates for lenders and borrowers; mandatory credit ceilings;
compulsory reserve requirements on commercial banks and control over the
allocation of credit thus repressing the economy.
Since interest rates were liberalized in Kenya, no study has been undertaken to
evaluate the effect of changes in interest rates on credit granted by commercial
banks which is critical to spur economic growth, hence this study seeks to fill this
gap.
This study utilized time series secondary data to establish the effect of interest
rates charged by commercial banks on credit granted by the banks. The data
was obtained from the Central Bank of Kenya records and publications, and
published accounts of commercial banks for the period 1992-2002 to test the
following hypotheses:
1) Interest rates have no effect on credit granted by commercial banks in
Kenya
2) Interest rates have an effect on credit granted by commercial banks in
Kenya
Regression analysis results indicate an inverse relationship between the level of
interest rates and th~ amount of credit g:anted by commercial banks. When
interest rates increase, the amount of credit granted by commercial banks to
their customers decreases while when interest rates decline, the amount of credit
granted by commercial banks increases. A t-test of the regression parameters
particularly the slope (b) at 5% level of significance revealed that interest rates
have no effect on the amount of credit granted by commercial banks in Kenya.
This further confirms research findings of low correlation coefficients for all
commercial banks implying the existence of a weak relationship between credit
and interest rates.
Research findings lead to the conclusion that interest rates are not the most
important determinant of the amount of credit granted by commercial bank
credit in Kenya.
Citation
Maingi KB,November 2003;The Effect Of Changes In Interest Rates On Credit Granted By Commercial Banks In Kenya.Publisher
University of Nairobi Faculty of commerce